Australia and its Region

Boats to patrol the Pacific

Karl PPB

Calls to fast-track the construction of new patrol boats to replace Navy’s hard-working but troubled Armidales, partly to help forestall the valley of death facing the nation’s naval shipyards, occur amid continuing debate over the cases for and against paying a premium to produce advanced vessels in Australia. Make-work programs to preserve ship-building job and skills are particularly controversial.

Given the complexity of the arguments now swirling over whether to replace the Armidales early (the youngest is barely six years old) it’s nice to be able to point to a naval manufacturing opportunity that’s warranted on strategic grounds alone, irrespective of any industrial or other benefits: Canberra should move to implement the Pacific Maritime Security Program. The PMSP is due to start replacing up to 22 old Pacific Class Patrol Boats (PPBs) in 12 countries from 2018 but isn’t funded in the forward estimates. Read more

On the surface, the prospect of gifting boats to replace vessels that haven’t always been well-used might appear extravagant with the Defence budget so tight. Current PPB performance varies greatly across the fleet but problems have included non-security related tasking (such as for VIP transport), some rough-handling including periodic runnings-aground, erratic routine maintenance, and disappointing rates of effort. By 2011, the PPBs were achieving 66 sea-days per boat per year, up from just 36 in 2008, but far fewer than the over 200 for the RAN’s patrol boats (which have two crews). PMSP wouldn’t be inexpensive either. Shadow Assistant Defence Minister David Feeney—an enthusiast—estimates 20 or so steel-hulled boats purpose-built in Australia for regional conditions would cost just under $300 million to deliver. Total costs could reach $1.5 billion over 35 years.

Yet the PMSP isn’t just ‘defence aid’. It’s more accurately viewed as a form of forward-defence and regional conflict prevention, which will be good for regional countries but also profoundly in our own national interest. Although far from cheap, it represents a cost-effective investment in being able to help shape, rather than merely react to, regional events.

For Australia, PMSP will preserve regional capabilities to police a vast area we’d otherwise have to look after ourselves. Working with local militaries, police maritime elements, and customs services to support their effective self-help is preferable to us asking (or being called upon) to act in other peoples’ jurisdictions. Supported by a small network of posted RAN personnel, PMSP will also promote a continuing welcome for the ADF’s, low-key but visible, enduring strategic presence across our maritime approaches. Familiar and valued cooperation delivers both direct benefits—such as extra reach for our search and rescue efforts or deterring drug-smuggling aimed at Australian markets—and indirect value, such as situational awareness, influence, and opportunities to engage traditional regional partners—the US, France and NZ. It may also moderate any adventurism by actors from outside the region, whether ascendant powers, marginalised states, or investors.

For participating countries, PMSP will modernise cooperative efforts to protect marine resources, enforce sovereignty, and counter transnational crime. The program should include enhanced surveillance, coordination, and technical-legal collaboration to make the most of the new boats. The absence of a follow-on to PPB would heighten vulnerability to socio-economic sources of instability. Fishing is critical to regional countries, but they are hard-pressed to protect their resources, having mostly small populations and large EEZs. Illegal fishing already plunders a billion dollars from regional coffers each year. And economic pressures could contribute to the need for lengthy, costly and risky stabilisation missions.

PMSP could also be progressed without a large one-off spend. Introducing a couple of boats per year as the current PPBs reach their maximum extendable lives from 2018 to 2027 would spread acquisition costs. Enhanced aerial surveillance and other potentially expensive components of PMSP could also be added gradually as economic circumstances and operational tempo permit.  Cheaper, potentially suitable, foreign patrol boat designs are available, though with some symbolic and practical downsides. NZ could chip in (it already provides PPB personnel) given its Cook Islands and wider responsibilities. And wealthier recipients may value PMSP more if they make a contribution in return for some say in capability specifications. A proportion of costs for non-military vessels might be deemed aid-eligible for non-strategic tasks such as food security. Hand-me-down Armidales would be prized for their sleek lines—they aren’t your grandfather’s PT boat—and might fill a short term gap, but could also be uneconomical and unsustainable over the longer term.

Whatever option Government chooses, PMSP deserves some numbers against it in next month’s budget alongside the much larger figures for grander investments in our maritime security.

Karl Claxton is an analyst at ASPI. Map (c) ASPI 2014.

What do the AWD problems tell us about the future submarine?

I recently took a look at the ANAO’s audit of the Air Warfare Destroyer (AWD) program. The report is a solid read at 320 pages, but should be required reading for anyone making decisions about the future submarine. And there should be a test afterwards.

The first, and most important lesson is the need for design stability—and for the design to be in a form readily digestible by those who need to turn it into hardware. A great many of the problems experienced in the AWD build have been due to either changes in design details, or the difficulty of translating the design drawings into concrete production activities.

The ANAO’s figure 5.7 (reproduced below) shows the number of entries in the project’s ‘problems and issue reports’ database by category. Nearly half the records related to design issues. The fault for those problems shouldn’t be laid solely at the feet of Navantia as the design house, although there have been attempts to do so. But it’s worth understanding what went wrong.

Figure 5.7: Categories of problem and issue reports, July 2009 - April 2013 Read more

Part of the problem is that this is the first time that Navantia has exported a design. They’re used to preparing drawings for its own workforce in its shipyards at Cádiz—a workforce familiar with both the design philosophy and the technical drawing equivalent of ‘shorthand’ employed and, more importantly, the tacit knowledge of ship production assumed by the designers. An inexperienced Australian workforce struggled to translate them into executable work. This problem reflects the lack of a shared understanding of design and build approaches—an issue that should’ve been identified during the long and costly analysis that lead to the selection of the Navantia design (of which the shipbuilder ASC was a party).

Exacerbating this problem, the Australian workforce lacked critical skills at the production supervision level. In the case of the well-publicised problems with the poor quality of the blocks built in Melbourne, Defence’s 2010 advice to the Minister is pretty clear:

… the poor build quality was largely the result of BAE Systems not having sufficient experienced production supervisors—workshop engineers and foremen—despite being one of Australia’s most experienced shipbuilding organisations.

BAE were having none of it, there were again attempts to lay the blame at Navantia’s feet, and we were treated to the unedifying spectacle of ASC and the DMO arguing the toss with BAE in the press. The ANAO makes it clear that there’s plenty of blame to go around.

Now all this might be OK if it was behind us, but it looks far too much like a taste of things to come. The future submarine project will face all of these problems and more. In the case of the AWD, we started a build with a first-time shipbuilder and an inexperienced workforce. Seven years on, productivity remains well behind planned levels and even further behind industry standards for an experienced yard—the result of a combination of overoptimistic planning and ineffective production management. That’s despite the benefit of starting with a design that was pretty well understood, with a similar vessel already in production in Spain.

The future submarine won’t be like that. If it’s to come anywhere near the articulated requirements, it won’t have much in common with boats elsewhere. If we stick with the expected European conventional submarine technology and an American combat system and weapons, we’ll have to import design elements from more than one supplier. In short, we’ll be starting a harder journey from no better a starting point than the AWD.

That’s not an insurmountable problem. Given time and resources, we could pick our way through the challenges, hire the experienced people needed to manage the project and do the due diligence required to stabilise requirements and, subsequently, the design. It’s having the time that’s likely to be the issue; much of the discussion about Australian naval shipbuilding has focussed on the so-called ‘valley of death’ facing the blue collar workforce as AWD work winds down. And that is a problem—workforce productivity takes time to build up to best practice standards. But we need to be careful not to embrace costly ‘make work’ projects with cost premiums that exceed the savings which continuity of work might deliver via higher productivity.

I’d argue that much more important at this stage is managing and harnessing the skills required at the white collar end of the process—the engineers, designers and production managers who have to sign off that the chosen submarine design is fit for purpose and ready for production. I fear that we’re already at the wrong end of the valley for many of those skills as the design work for the AWD recedes into the past. The ANAO estimates that the overall productivity in the AWD build is such that it’s costing $1.60 for every planned $1 worth of work. Their report suggests that a lot of that is to do with design and production issues, not just fabrication.

My high school metalwork teacher used to exhort us to work with ‘less haste and more speed’, which I think is exactly what’s needed for the future submarine. Here’s my dot point list of things we need to do:

  • ensure that senior engineering and design personnel from those firms chosen to provide major systems are embedded in the project team, not on the other side of the world
  • accept that we’ll need to import production techniques as well—which means that shipyard foremen and production supervisors should be imported with the design
  • ensure that we have a stable and suitably documented design, and resist the urge to get to the metal fabrication stage as soon as possible as a means of providing shipyard jobs.

Andrew Davies is senior analyst for defence capability at ASPI and executive editor of The Strategist.

Free financial advice

Financial planning?

Over the past two decades, Defence has staggered from one budget crisis to the next, trying to afford the unaffordable.

Of the five White Papers issued between 1976 and 2009 for which ex post fact evidence is available, only the Howard Government’s 2000 effort was funded as planned. All the rest ended up delivering substantially less money than promised. To make matters worse, for most of the period in question, Defence was planning beyond its means anyway, by systematically underestimating both its acquisition and recurrent costs. Thus, even if promised funding had been forthcoming it would’ve been inadequate for the task. Defence’s plans were damned twice over. Read more

In practice, there’s little that can be done to force governments to keep their commitments; politicians routinely break promises. On the other hand, it should be possible to curtail the habit of underestimating costs. With a new White Paper underway, now’s a good time to start.

The problem is hardly unique to Australia; one of the ‘key drivers’ of the UK’s 2010 Levene inquiry into structure and management of the Ministry of Defence was ‘the Department’s over-extended programme’. It was no mistake that Lord Levene mentioned ‘affordable’ or ‘affordability’ 32 times in his report. Overly optimistic planning leads to wasteful cycles of overinvestment followed by underinvestment as financial reality overtakes military fantasy.

Levene’s solutions for the United Kingdom are largely built around improved governance and accountability. But while such approaches are likely to be valuable to Australia in the longer term, the clock is already running on the 2015 White Paper; we need practical measures now to ensure that the resulting plan for the ADF is affordable.

The good news is that we aren’t starting with a blank spread sheet. Over the past decade, Defence has made steady progress in understanding its current and future costs. The sorts of egregious underestimates of acquisition costs that appeared back in the 2001 Defence Capability Plan (DCP) are much rarer today. At the same time, the ongoing refinement of Defence’s budget has led to a better understanding of recurrent costs than in the past. These are firm bases upon which to build.

Nonetheless, the government should treat Defence’s cost estimates with great caution. Two interplaying factors predispose the organisation to systematically underestimate its costs.

Firstly, Defence’s civilian and military leaders are positive ‘can-do’ optimists. Nothing out of the ordinary there—most large organisations are led by similarly incautious souls who got to where they are by doing rather than naysaying (helped by a survivorship bias towards those who are lucky enough not to fail at a prior point in their career and are hence unjustifiably confident).

Second, and more importantly, moral hazard comes into play within Defence. Proponents of individual projects—for example the RAAF seeking a new fleet of aircraft—have an incentive to underestimate costs so as to get the project on the books irrespective of whether it’s affordable. Once a project is in the DCP it’s difficult to dislodge without political cost, and the problem of funding it becomes the taxpayer’s rather than the Air Force’s. For exactly the same reasons, industry has equally strong incentives to systematically underestimate future acquisition and support costs when answering initial queries from Defence.

The government needs to protect the taxpayer’s interests against the twin onslaught of self-delusion and deception. And it’s not simply a matter of worrying about the cost of projects in the DCP. To be affordable, the next White paper will need to take into account the cost of not just acquiring but of crewing and operating all of military capabilities in the ADF, along with their attendant administrative overheads, now and into the future. This means building a detailed model of the Defence budget.

An effective model of the defence budget would combine bottom-up estimates of the cost of individual activities—such as maintenance programs and acquisition projects—with projected trends in key cost drivers such as personnel expenses, foreign exchange rates, equipment and facilities maintenance costs. Critically, the model shouldn’t be designed to deliver a single estimate but rather to capture the spread of possible future costs given the inherent uncertainties and credible ranges for economic trends.

In some way or form, Defence will already have many of the building blocks of such a model—if only to support the annual budgeting process. But to guard against a conspiracy of optimism again delivering an unaffordable plan for the ADF, the government should ensure that the model is comprehensive and credible. There’s no shortage of consulting/accounting firms which could both assist Defence with the development of the model and warrant its robustness to the government.

Defence could also benefit from external help to understand the cost of its major programs. One way to do this would be to get independent cost estimates for the top 30 projects by value in the DCP, including the personnel and operating costs associated with new capabilities—an area that the 2011 Rizzo Report found wanting. Apart from helping to guard against conscious and unconscious internal biases, independent advice would inject additional technical rigour into the process. Estimating the cost of major projects (defence or otherwise) is a technical exercise, so outside help would certainly come in handy. To get a feel for the complexities, have a look at this 2005 study by the RAND Corporation on the UK government’s carrier project or this 2008 NASA Cost Estimating Handbook.

Amid the heady discussion of defending Australia against the myriad uncertainties of the Asian century, the question of reliable costing can easily be dismissed as a sideline. Who can be bothered with financial niceties when there’re issues of grand strategy to be discussed? Let’s hope the government can be bothered. As the Levene Report observed, reliable financial planning ‘is not a distraction from providing the capability the country needs; it is an essential enabler to it’.

Mark Thomson is senior analyst for defence economics at ASPI. Image courtesy of Flickr user Images Money.

Decision time for Australia’s F-35 plans

Lockheed Martin's F-35 assembly line at Fort WorthThe government looks set to spend somewhere between $8 and $10 billion on F-35 Joint Strike Fighters, which would then constitute the bulk of the RAAF’s air-combat capability for decades to come. The aircraft has had a difficult upbringing, but there are a few myths about it that we think are worth dispelling.

  1.       Prices are still climbing.

Actually, no. The F-35 is never going to be the bargain price fifth-gen strike fighter beloved of glossy brochures in the early 2000s, but the price is now trending in the right direction. The last annual production batches have come in at lower prices than the US budget estimates. Of course there’s always potential for a cost-escalation while risks remain in the development program but, as shown in Friday’s post, that’d be a departure from the recent trend. Estimates of support costs are also coming down. Read more

2.      The F-35′s development continues to be a problem.

Well, this is partly true. There are certainly challenges remaining—software development and integration, and fixes for structural cracks in the US Marine Corp’s F-35B (which won’t directly affect Australia’s A-variant purchase), for example. But the overhaul of the program which began in 2010 produced a timetable that’s mostly holding—certainly far better than previous performance.

3.      Professionals in the military are still concerned about the performance of the aircraft.

In talks with the USAF and RAAF, the noises we get about the performance of the F-35 are overwhelmingly positive. In the words of General Mark Welsh, Chief of Staff, US Air Force:

When a fifth generation fighter meets a fourth generation fighter—[the latter] dies. We can’t just dress up a fourth generation fighter as a fifth generation fighter; we need to get away from that conversation.

If anything, the problem is that enthusiasm from the services that will employ the F-35 is so strong that it’s difficult for them to hear the case for scenario-based planning which explores less capable acquisition options.

The picture we get is that after a shaky start and more than a little denial, the JSF program’s now starting to behave as promised. That said, the history isn’t great. Prices have risen sharply from the 2002 quote of US$40 million per aircraft flyaway (around US$55 million in 2019 dollars). That compares to the latest USAF budget figure of US$97 million, an increase of 76%. As we noted above, the actual price is likely to be a bit less than the budget figure and US$90 million is a reasonable estimate. And there are other costs; because the F-35 schedule has slipped, old aircraft need to be kept going until they can be replaced. But even so, the revised price is still within the AIR6000 budget, which seems to have contained a generous—but subsequently necessary—allowance for cost increases.

Similarly, schedules have blown out. But now it seems likely that the US Marines will be able to achieve Initial Operating Capability (IOC) with their F-35B short take-off vertical landing ‘jump jet’ variant sometime around the end of 2015. The F-35A conventional take-off and landing variant, which Australia is buying, should enter service with the US Air Force in the second half of 2016.

That gives Australia some margin of comfort for the RAAF’s own planned IOC of 2020, which would allow the phased retirement of the vintage Hornet fleet as planned. In fact, the first two Australian aircraft will be rolling off the production line in the States in the coming months, from where they’ll join the training fleet in the first instance.

There aren’t many credible alternatives. The only one would be for the government to decline an F-35 purchase, and go with a further purchase of Super Hornets, giving the RAAF a single-type fleet of strike fighters (augmented by Growler electronic warfare aircraft). That would provide some savings, at the cost of a lower overall capability than a mixed fleet including both F-35s and Super Hornets could offer. But new Super Hornets would have to be ordered now, as the production line is winding down, and spending an extra many billions of dollars out of the forward estimates period isn’t going to happen.

And there’d be other costs to backing-away from the JSF, not least the ripples it would cause in Washington—there’s alliance capital tied up in the F-35. On balance, and while past decisions might’ve been handled differently, we think the F-35′s now on a stable enough development footing that a decision to purchase the F-35 is both responsible and fits government priorities.

Our new report, out today, has more detail.

Disclosure: Lockheed Martin, the prime contractor on the F-35 program, and Boeing, manufacturer of the Super Hornet, are corporate sponsors of ASPI.

Andrew Davies is senior analyst for defence capability at ASPI and executive editor of The Strategist. Harry White is an analyst at ASPI. Image courtesy of US DoD Inspector General.

Graph of the week: F-35 update

The National Security Committee of cabinet will soon consider a submission from Defence regarding the proposed approval of a buy of (probably) 58 F-35 Joint Strike Fighters in addition to the 14 already approved.

We’ll be publishing a discussion paper on Monday that looks at the pros and cons of that proposition. And it won’t be a surprise that one of the major issues will be the state of the F-35 development and production program. The F-35 and the process of developing it have been subject to some trenchant criticism over the years—and with good reason. The performance of the prime contractor has left much to be desired at times, and the apparently hands-off management practiced by the Pentagon in the early years led to a series of cost increases and schedule slippages.

Some of those trends weren’t surprising, as early estimates of costs were well below the historical trend for combat aircraft. (The most recent ones certainly aren’t.) And the joint development of three very different variants—one for conventional takeoff and landing, one designed for carrier operations and a ‘jump jet’ for the US Marines—meant that initial schedules were seriously optimistic. Read more

But some of the underperformance could squarely be sheeted home to poor program management. Combined with a tendency of those involved in program management and execution to downplay all of the increasingly obvious problems, a serious credibility issue developed. Some of us got to the point where a comment from an F-35 spokesman that it was a nice day would require confirmation from the US Government Accountability Office.

That’s all part of what the now head of program Lt General Chris Bogdan  described here in Australia last week as the ‘tragic history’ of the F-35 program. But he also went on to describe a much tighter management approach today that has seen much improved performance against the program’s 2011 revised milestones. Let’s see what this year’s Pentagon budget papers—released last week—have to say about that.

Last year I presented some graphs of the history of US Air Force F-35 budget plans going back to 2006. They showed a pretty clear picture of the history as described above, but also hinted at a more stable present. This year’s figures reinforce that view.

The first chart (click to enlarge) shows the budget cost planning figures for each of the budgets since the 2008 financial year request (in March 2007). The three phases—I’ve labelled them ‘early optimism’, ‘reality intervenes’ and ‘recent stability’—are clearly visible. For aircraft purchased later this decade, as Australia’s planning to do, there’s been little change in the last three budget cycles. (All prices in 2014 US$ millions.)

F35 Graph 1

Source: USAF budget papers ‘aircraft procurement volume 1’

The second chart shows the planned cumulative production numbers of the Air Force variant. The same three phases are obvious.

F35 Graph 2

The same conclusion as last year applies—where the F-35 is concerned, the US Air Force is determined to put its money where its mouth is these days. Given the difficult budget environment in Washington, that’s no small vote of confidence.

Of course, there are factors other than program stability to be considered when deciding whether to spend billions of taxpayer’s dollars. We’ll come back to those next week.

Disclosure: Lockheed Martin, the prime contractor on the F-35 program, is a corporate sponsor of ASPI.

Andrew Davies is senior analyst for defence capability at ASPI and executive editor of The Strategist.

The AWDs and the auditors—round two

A computer generated image of the Air Warfare Destroyer (AWD). The project will deliver three world-class ships and their support systems to the Royal Australian Navy ( RAN).

When the Australian National Audit Office’s audit report on the Air Warfare Destroyer program was released last week, I was told by a veteran journo that it was a bit of a disappointment to his colleagues. They’d apparently been hoping for a story about a Defence managed fiasco that’d make for screaming headlines along the lines of ‘billions wasted says government watchdog’.

That’s an unfortunate reflection on the state of news reporting these days, because the ANAO report is a very important one, and it has implications far beyond the AWD program. It fills out much of the detail hinted at last year in ’round one’. And I’d have thought there are enough titbits in there to make for at least a moderately unhappy story if that’s what required to sell papers (or, increasingly, to draw clicks). But it’s also to my eye the auditor’s best Defence project effort to date, so let me at least put my vote of thanks on the record for an important piece of work.

This report is especially significant because there’s bipartisan support in Australia for continuing naval shipbuilding in country. So despite the shortcomings in the AWD build, more such projects are likely to follow—with costs to taxpayers running into tens of billions of dollars. It’s pretty important to understand what’s happened in this case. Read more

I’d recommend reading at least the summary of the report, but I’ll provide some comments on what I think are the most salient points. Let’s start with the headline issue of cost overruns: the alliance building the vessels is reporting an estimated final cost of some $302 million, or 6.8% above the target cost estimate. But given that the overrun in the 2012–13 financial year was $106.4 million as a result of increased labour, materials and subcontract costs, largely for the relatively straightforward industrial work of module construction, and that the difficult system integration parts are still to come, it could easily get worse than that. The ANAO says as much: ‘the current estimated cost [overrun] of $302 million … should be treated with caution; the cost increase is likely to be significantly greater. … the program is approaching the complex stage of systems integration when, historically, cost and schedule risks tend to rise’.

So by the time the program’s finished, we’re going to end up paying an even larger than expected premium for local construction of these vessels. The report tells us that the 2007 Treasury estimate of the premium was ‘around $1 billion’. My estimate was $1.5 billion (PDF), which probably won’t be far off the mark. We also learn that the ‘effective rate of assistance’—a measure of economic distortion due to the program—was estimated at 30%, a figure well above the level for other subsidised industries.

Those figures are sobering. Naval shipbuilding is an enterprise that’s consuming taxpayer’s resources that are therefore not available for other government programs. And there’s no shortage of lobby groups making the case for expanding it, arguing that it’s the stop-start nature of the business that has caused the problems seen here. Indeed, the ANAO includes some comments along those lines from two of the shipbuilders (whose performance fell short of what was expected when the project was approved):

… companies that have participated in the AWD Program, our company included, have faced a significant challenge from the need to re-establish capability, capacity and experience after the gap in naval shipbuilding that preceded the start of AWD construction.

And:

… the costs of ramping back up to a competitive shipyard to maintain the indigenous shipbuilding capability have not been fully appreciated in terms of the magnitude of the investment required in facilities, recruitment, training and retention of the workforce to reach competitive productivity; once established, the shipbuilding capability will once again dilute and disappear if not utilised in an ongoing shipbuilding program out across the Defence portfolio.

As I said above, there’s bipartisan support to respond positively to these entreaties. So the policy question now becomes ‘how best to ensure that the local naval shipbuilding industry performs as well as it can’? The first thing to do is to try to work out how much of the underperformance of the AWD program is due to genuinely unavoidable learning issues in an industry that hadn’t built a warship in well over a decade, and how much is due to factors more amenable to best practice management.

There’s plenty of evidence in this report of start-up and inexperience woes, which seem to have taken pretty much everyone by surprise, despite $262 million being spent on due diligence activities before contract signature. And some of the problems should’ve been predictable. Looking over the report, devotees of Augustine’s and Gumley’s Laws will recognise some old friends. In paragraph 26, for example, we find:

… additional modifications primarily to accommodate the Australianised Combat System, which comprises an upgraded Aegis Weapon System and additional Australian elements to meet specific capability requirements. The selection of largely existing platform and combat system designs formed the basis of the DMO’s technical risk reduction strategy for the Program, and was considered at the time to provide a high level of comfort.

The ‘specific capability requirements’ might well be Augustine’s final 10% of capability, which we know leads to 1/3 of the cost and 2/3 of the risk. And Gumley’s laws remind us that combining off-the-shelf systems isn’t off-the-shelf. (MOTS + MOTS ≠ MOTS)

But that was then and this is now. And those errors, while regrettable, are now behind us. Hopefully we’ll learn from the experience and not repeat the beginner’s mistakes that have plagued this program. Next week I’ll come back to the report and tease out what it might teach us for future naval shipbuilding programs. There are some powerful lessons here—especially for the future submarine.

Andrew Davies is senior analyst for defence capability at ASPI and executive editor of The Strategist. Image courtesy of Department of Defence.

Mega fauna and the DCP

Mega fauna

Yesterday I appeared in front of the Joint Parliamentary Committee on Public Accounts and Audit. It’s not my usual haunt, but they were holding a public hearing into the Australian National Audit Office’s Audit Report No. 6 (2013-14) Capability Development Reform, which they correctly guessed I had an interest in.

Appearing in front of Parliamentary committees is always interesting. And it’s not a bad cure for cynicism caused by the sound bite focused 24/7 news cycle reporting of politics. Invariably, the committees are interested in understanding complex issues, and there’s rarely evidence of partisan point scoring.

Here’s what I told them. You’ll be able to read the exchange that followed in Hansard in a little while. (Complete with all of my misspeaking and false starts to sentences etc.—it’s not always edifying reading for the speaker!) Read more

—–

I’d like to thank you for the opportunity to make a short opening statement. By way of background, I have been professionally involved in defence capability development for nearly two decades now. That has included providing scientific input into force development considerations, managing a sizeable major project, and the management and planning of a portfolio of projects within intelligence. Since leaving the Department, I have been a frequent contributor to the public debate on defence policy, planning and acquisitions.

But I should start with two caveats. First, it’s now almost eight years since I was an employee of the Department of Defence, and longer since I was involved in the central processes of capability development that are the subject of this Committee’s deliberations. While I attempt to stay as current as possible, there are bound to be points of detail I’m behind the curve on. Secondly, the Minister announced last week that I would be on his advisory panel for the development of the next defence white paper. That process has not begun yet, so anything I say today in no way reflects the views of the Minister or of the department of defence.

When the ANAO report into capability development was released late last year, my colleague Mark Thomson and I wrote a critique of it for our corporate blog. I’d like to table that work in two parts. For the public record, I’d add that I received some comments and a very helpful briefing from the Capability Development Group between the publication of those two parts. They felt that the first part reflected an insufficient appreciation of the efforts made to reform defence capability planning in recent years. The second part, I hope, reflects the discussion we had.

Let me say that the criticisms I’m about to make shouldn’t be taken as a reflection of either the professionalism or the hard work of the CDG. Rather, I think they have been grappling with some difficult issues, and making some decent headway towards a more rigorous and internally transparent process. I say ‘internally’ there quite deliberately. From the outside it’s often difficult to discern the details of the process or to infer the train of logic underpinning decisions from the observed outcomes.

Because of that, I think the most productive way for me to proceed today is to largely ignore the internal machinations of the CDG and to look instead at their inputs and outputs. I think there are substantive issues at both ends of the process.

We can safely conclude that something is badly askew in the capability development process based on an assessment of the current Defence Capability Plan and the Defence budget. Mark Thomson has described the latter as an ‘unsustainable mess’—a turn of phrase not used lightly—and I refer you to his budget briefs of the last few years where you’ll find a great deal of evidence to support that claim.

My role at ASPI is to look at force structure planning, and I take a strong interest in the DCP and its capability and budgetary implications. And there’s a huge problem on the horizon. Simply put—there’s nowhere near enough money in the Defence budget, even if promised increases in funding manage to fight their way through the competing government priorities.

By any reasonable calculation, the DCP is heavily oversubscribed. I can’t recall a time in which there were so many very large projects. The DCP doesn’t have just one elephant in the room, it has a herd of them. The future submarine, future frigate, F-35 joint strike fighter, armoured vehicles for the Army and maritime patrol aircraft projects total, by my estimation, over $100 billion for the acquisition phase. To put that in perspective, the current annual acquisition budget is around $5 billion.

In other words, the ‘mega fauna projects’ would consume two decades worth of the current funding on their own—leaving little or no room for all of the other projects that are necessary to keep the ADF effective. This can’t work.

When Mark Thomson and I did our own costings of force structures we got a very different answer to the costings—such as they were—in the 2009 defence white paper. I’m happy to talk some more about that.

As I see it, the capability development process is effective, more or less, at de-risking individual projects, but isn’t adequately managing the portfolio of inputs. I suspect that there are problems with the inputs to the process—another point we might usefully discuss. Simply put, the best process in the world can’t produce sensible answers from the wrong starting point.

Andrew Davies is senior analyst for defence capability at ASPI and executive editor of The Strategist. Image courtesy of Flickr user benh LIEU SONG.

Graph of the week: if you want it on time, keep it simple

Late last year, I gave some early impressions of the Australian National Audit Office’s Major Projects report. Today I’ll have a closer look at some of the data in the report, which will bring us back to another of ‘Gumley’s Laws’. This time the subject is the impact of developmental work on project delivery. (The previous Gumley’s law post was on over-programming in the Defence Capability Plan.)

First, the data. The figure below is taken from the ANAO report and is DMO’s breakdown of the delay in projects delivering Final Operating Capability to the ADF. The projects are split into three categories—military off-the-shelf (MOTS), ‘Australianised MOTS’ and ‘developmental’.

Source: ANAO Major Projects Report 2012–13

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The figure is a stark illustration of the penalty paid for developmental work. None of the developmental projects have been delivered without a 40% overrun in schedule, and the average is 92%—almost double the planned time. Note that the F-35 Joint Strike Fighter is excluded by the DMO as ‘not applicable’ because it’s ‘should ultimately become MOTS when it enters production line delivery’. But it certainly doesn’t buck the trend—on original plans the RAAF were to have their first operation squadron in 2012, but will now have to wait until 2020.

The breakdown into three categories is very coarse, but previous data sets had more fidelity, which allow us to estimate the effect of project complexity on schedule. The figure below is drawn from earlier ANAO reports, when the DMO gave a project complexity figure on a scale from 1 (simplest off-the-shelf) to 10 (most complex integration and development). While the data set is fairly sparse, it suggests the expected delay in project delivery is about 6–10 months per degree of complexity compared to an OTS purchase. And that’s about right when we compare it to the delays in delivering projects like the Collins class submarines and the F-35.

Source: DMO data on major defence projects

Gumley’s laws include two observations pertinent to this. The first is that:

Off-the-shelf acquisition of products that are technically mature is the only reliable way of avoiding cost and schedule risk. (Gumley’s 1st law)

That rule (which should be self-evident) has a natural corollary that Gumley also identified:

 Deviation from MOTS increases risk, cost, and schedule and should only be pursued when there are no MOTS systems with acceptable performance. (Gumley’s corollary to Law 1)

I’d go further than that. If we combine Gumley’s first law with Augustine’s observation that ‘the last 10% of the performance sought generates one-third of the cost and two-thirds of the problems’, I think the corollary should take Augustine into account and read more like this:

Deviation from MOTS increases risk, cost, and schedule and should only be pursued when there are no MOTS systems with performance within 10–20% of that sought and when the extra performance is judged to be critical.

Gumley’s second law is a less obvious, but no less important observation:

 Combining two MOTS systems is not MOTS. (Gumley’s 2nd law)

It’s important because it’s much easier to conceive projects that involve taking two separate MOTS components and integrating them —even ones that are themselves mature and fully functional—than it is to deliver them. Some examples from Australia’s experience include the lengthy process of integration of the AGM‑142 missile onto the Royal Australian Air Force’s F‑111 fleet and the much delayed FFG frigate upgrade. In both case all of the subsystems were well-understood, but the interplay between them was anything but straightforward to manage. The FFGs re-entered service years later than expected and the F-111 managed to fire its first AGM-142 just over a year before the airframe was retired. (A quick mea culpa: my fingerprints will be found on that sorry saga.)

Perhaps the most egregious example was the failed attempt to modernise the Super Seasprite helicopter, which required the integration of flight and combat systems, weapons and sensors sourced from multiple suppliers. The net result was a $1.4 billion investment for no capability return at all.

Gumley’s second law also has a corollary:

 ‘Australianised MOTS’ is an oxymoron.

Or, to put it simply: ‘if you change it, it isn’t MOTS’. Again, the data bears this out. The ‘Australianised MOTS’ projects in the ANAO chart above have an FOC delivery variance of just under 50% above the planned figure—not as bad as the developmental projects, but a long way short of the MOTS projects, for which the average slippage is closer to 2%.

Andrew Davies is senior analyst for defence capability at ASPI and executive editor of The Strategist

We’ll build ships together

Crane 8 at the old Cockatoo Island dockyards

It’s becoming something of an annual tradition that I get asked along to the Australian Defence Magazine (ADM) conference and get to be the token economic rationalist on Day 2. At an industry-focused conference, that’s a bit like being the crazy uncle at the Christmas dinner table. Last year, for example, I was asked to talk about whether there’s a future for non-sovereign providers of defence material—and decided instead to argue that it’s actually the sovereign providers who are an endangered species.

In other ventures onto the stage at defence industry functions I’ve variously argued that we should take advantage of other countries (PDF) that prop up their defence industries with government funding by buying the below cost products that emerge, and (with partners in thought crime Henry Ergas and Mark Thomson) that we should allow the cold winds of competition (PDF) to blow through the Australian naval shipbuilding industry in the name of efficiency. Read more

So it makes a bit of change for me to take a different tack this year. At my talk earlier today for the 2014 ADM Congress, my starting point was that the future of shipbuilding in Australia is assured because of political buy-in, so we really should be talking about the best way to manage it. It’s not that I’ve had a roadside conversion, but I think that’s an accurate reading of the strong indications evinced by both sides of politics. Just yesterday, the Ministers of Defence and Finance announced a review into the troubled Air Warfare Destroyer program—of which more anon—and commented that the exercise:

… is a demonstration of the Government’s commitment to working collaboratively and constructively to ensure we realise both the national security benefits and the long term benefits of the AWD Program for the Australian shipbuilding industry.

So it looks like we’re going to have a naval shipbuilding industry for some time to come. The trend was already that way, but I think that the recent demise of the local car industry made it pretty much a done deal. Already the sharks are circling, and various industry players and state governments are vying for position, trying to get guarantees for work to keep their declining manufacturing base active.

But vested interests generally don’t make for good public policy, so the next step should be to work out how to protect the taxpayer’s interests—and the state of the AWD program is a strong indication that those interests need protecting.  Yesterday’s announcement was no surprise to those of us who have followed the increasingly fraught progress of the program; Mark Thomson previously identified potential problems with the project’s ‘alliance’ structure and the Australian National Audit Office and the DMO themselves provided enough insight into the state of play in last December’s review of major projects to make it clear that there was a big problem. Simply put, the project has been chewing through money faster than expected, and producing ships slower than expected, and there seems to be a real chance that it will run out of money before the third ship is delivered. (Another ANAO Audit report due next month should give a more detailed picture.)

The first step is to accurately diagnose the problem, which should be the main focus of the new review. The reasons likely to be cited will be many and varied, and will include attempts to blame the Spanish designer Navantia, and there’ll be much gnashing of teeth about the ‘stop-start’ nature of shipbuilding in Australia and the resulting penalties in getting shipyards back up to speed after a period of relative inactivity. Most of the proffered explanations will contain a grain of truth, and the picture that emerges might be a complex one.

But there are clearly some significant shipyard productivity problems at the heart of the problem, probably exacerbated by overly-optimistic estimates of how quickly the shipbuilders could get up to speed in the AWD build (despite over $200 million being spent on studies and risk retirement before contract signature). Again, that’s not surprising—with the government acting as sole customer and owner of the main shipbuilder, the sector hasn’t exactly been competition central. At least it’s almost certainly better than the old government owned naval shipyards at Cockatoo Island which gave rise to not one but two Royal Commissions in 1903 and 1921.

There are many tens of billions of dollars of naval shipbuilding projects in the wings, in the form of the two at-sea replenishment ships, twelve future submarines, twenty new patrol vessels and eight future frigates in the Defence capability Plan. In fact, there’s enough work in the forward plan for industry and state governments (South Australia’s foremost) to be pushing the idea of a ‘rolling production program’ in which we build ships and submarines in perpetuity.

So the stakes are very high in this review. It’s very hard to see how a government that is being very protective of its budget could enter into a commitment of that sort on the basis of the performance it has seen so far. Make no mistake—the worse the AWD story, the more risk-averse the government is likely to be. While there’s political buy-in to sustain a shipbuilding industry in principle, in practice, funding might be hard to come by if it looks like sheltering systemic underperformance.

In particular, the AWD program has probably just done the most aspirational vision for the future submarine a major disservice. Unless there’s a clear path is identified towards a higher performing shipbuilding sector, the less risky submarine options can only become more appealing. We’ll tease out the implications of that here on The Strategist in the next few weeks.

Andrew Davies is a senior analyst for defence capability at ASPI and executive editor of The Strategist. Image courtesy of Flickr user The Waterboy.

It’s time to review the AWD

Senator the Honourable David Johnston, Minister of Defence addresses the invited guests at the keel laying of the second Air Warfare Destroyer at the ASC shipyards.

It’s Australia’s biggest current defence project and a multi-billion dollar headache for Defence Minister David Johnston. The Abbott Government is expected to commission soon a broad scale external review of the $8 billion air warfare destroyer project as concerns grow within the government about cost-blowouts and schedule delays.

The first of the three AWD’s, HMAS Hobart, was originally due to be handed over to the RAN later this year but the delivery schedule has since twice slipped and the Hobart handover is now due in early 2016 with the final vessel, HMAS Sydney, to be completed in 2019. An even bigger concern, according to senior defence sources, is that the AWD project has spent the lion’s share of budgeted funds well before the delivery of single hull, putting the project’s remaining contingency reserve at risk.

Estimates of the projected AWD project cost blowout are now well north of half a billion dollars and counting. An ANAO report, believed to be strongly critical of the management of key aspects of the $8 billion project, is due to be published next month but its findings have been challenged by the DMO and Defence. Read more

The Minister is now considering the appointment of an independent, possibly US-based defence expert, to head up the review team. The review, which will also cover financial aspects of the project, will report back to the Defence Minister within six months on ways to get the AWD project back on track and ensure a successful completion of the three air warfare destroyers.

How the Minister manages the unfolding AWD saga will have a vital bearing on the future of naval shipbuilding in Australia, with the government due to make major decisions on the next generation submarine build as well as future surface warship construction including the follow-on frigates to replace the ANZAC-class vessels.

A successful AWD build is a prerequisite for any sign-off by the Abbott Government on the local construction of a replacement for the Collins class submarines. It’s nearly seven years since the contract was signed for the construction of three AWDs by three shipbuilders around the country, with final assembly at ASC’s shipyard in Adelaide.

The AWD Alliance was established to manage the project. A wholly novel arrangement in the context of Australian naval shipbuilding, the AWD alliance was always destined to be a high-risk gamble for the government. It wasn’t just the modular construction technique adopted with three separate facilities building the 31 individual steel blocks that make up a complete hull. The heart of the AWD project’s financial and schedule problems stem from the nature of the alliance contract established to manage the warship contract. The AWD alliance brought together an unlikely trio of partners to manage the construction of the most complex and sophisticated warship ever built in Australia.

With Adelaide-based and wholly-government owned ASC chosen as the preferred shipbuilder, the Defence Department decided to bring in the Defence Materiel Organisation (DMO) and Raytheon Australia as the other two alliance partners. None of the partners had ever built a surface warship and the choice of Raytheon as an alliance partner was unusual given that its main commercial rival as a combat systems builder was Lockheed Martin, the supplier of the Aegis weapons system for the AWDs. ASC’s only track record was as the builder of the Collins class submarines and the government-run company’s board has always lacked a core of experienced naval shipbuilders.

Adapting the Spanish-designed F-100 ship for local construction in Australia would have been a difficult task even for an experienced naval shipbuilder such as Williamstown-based BAE Systems (formerly Tenix), which built the ANZAC frigates. And so it has proved, as Australian yards grappled with the drawings and construction practices furnished for the hull modules by Spanish shipbuilder and AWD sub-contractor Navantia.

Add to this the blurred lines of management responsibility through the alliance structure and the singular lack of naval-shipbuilding experience amongst the three partners, and it’s not surprising that the AWD project has run into difficulties. HMAS Hobart is now more than 80% complete, with some of its key systems already installed, but major challenges still lie ahead with the installation of the Aegis combat system now in store in Adelaide.

The Minister knows that the history of government-run naval shipbuilders in Australia hasn’t been a happy one. Thirty years ago the Williamstown Naval Dockyard, charged with building two FFG-class frigates for the RAN, was notorious for cost overruns and schedule delays.  Delivered into private ownership and under new management, the dockyard completed the FFGs and evolved into a highly successful builder of the ANZAC frigates.

With hindsight, the AWD project would’ve benefitted from having a single prime contractor charged with the authority to manage and deliver the warships.

Any external review will need to examine forensically the three-ship build and identify exactly how cost and schedule blowouts have occurred.

Down the track as he moves to define the next generation of naval platforms Johnston will also have to determine the future of ASC. Earlier last decade the Howard government ducked away from privatising the company. If the next generation of submarines is to be built in Australia, then the Abbott government should move to sell ASC—preferably to a strong industry consortium willing to make a strategic investment in Australian defence industry. At stake is the whole future of naval shipbuilding in Australia.

Patrick Walters writes regularly for The Strategist

Defence efficiency: ASPI’s view

On the 22nd of October last year, the Abbott government announced a National Commission of Audit to ‘to review and report on the performance, functions and roles of the Commonwealth government’. Headed by the chairman of the Business Council of Australia, Tony Shepherd, the Commission has a remit (PDF) to examine the scope, efficiency and effectiveness of government spending. A key task for the Commission is to recommend ‘savings sufficient to deliver a surplus of 1 per cent of GDP prior to 2023-24’.

With Defence accounting for 6.5% of government outlays, it will have to attract the attention of the Commission. There’s certainly a precedent; the Howard government’s 1996 Commission of Audit recommended a 10% efficiency improvement target for government agencies and specifically said that Defence should be included. It wasn’t. Instead, the government imposed an ‘administrative savings program’ amounting to only 1.3% of the budget. This time around, the situation is made more interesting by the Government’s promise to boost defence spending to 2% of GDP within 10 years. Read more

ASPI’s submission to the Commission regarding Defence can be found here. Key messages include:

  • The cost of maintaining a modern defence force increases by between 2% and 3% above the rate of consumer inflation. Consequently, the scale and/or sophistication of the ADF will decline in the absence of long-term growth in defence funding.
  • Boosting Australia’s defence spending to 2% of GDP within a decade will demand steady real increases of about 5% each year. Based on Defence’s struggle to absorb 3% real growth in the 2000s, such a high rate of growth may prove infeasible.
  • Settling a target of 2% of GDP for defence spending makes the cardinal error of privileging inputs (money) over outputs (capability). It’s almost certain that a reasoned analysis would yield either a higher or lower figure—there’s nothing magic about 2%. Moreover, with funding fixed at a significantly higher level than the recent past, the risk is that the White Paper will degenerate into a taxpayer-funded shopping expedition for the military.
  • In the past, the unreliability of defence funding has led to substantial waste and contributed to periodic Defence budget crises. The government needs to make a realistic long-term commitment to defence funding and stick to it as far as possible.
  • To guard against the emergence of yet another underfunded plan for the ADF, the government should commission an independent audit of the affordability of the 2015 White Paper to run concurrent with its development.
  • Over the 2000s, the combination of high operational tempo and steady funding growth led to an expansion of management and command overheads in Defence. To redress this unnecessary expansion, the government should:
    • Return the top-structure of Defence to something like it was in the late 1990s and continue the process down through the hierarchy.
    • Cut 20% of funding and personnel from all headquarters and policy functions across the organisation
  • Recent reforms instil confidence that Defence’s internal business processes can be made to work efficiently. Further refinement of Defence’s shared services model should be pursued in tandem with outsourcing where it’s cost-effective. Deeper levels of private support to ADF operations should be explored.
  • There’s nothing intrinsically meritorious about high numbers of military personnel, nor are civilian personnel inherently wicked or wasteful. The Defence workforce should be built around having people with the right skills and experience to do the job at hand at least cost.
  • Although there’s scope for further improvements to the conception and execution of major defence acquisition programs, the surest way to retire risk and deliver capability quickly is to buy proven equipment off-the-shelf.
  • Performance based contracting for materiel sustainment has the potential to boost efficiency. And, while doing so with legacy platforms is difficult, the support arrangements for new platforms should be established in tandem with their acquisition.
  • The benefits sought in establishing DMO as a prescribed agency haven’t been achieved. Nonetheless, privatising DMO would be a mistake. Instead, it should be administratively reabsorbed into Defence.
  • With massive naval shipbuilding programs now taking form, critical decisions that will determine the long-term efficiency of the sector are looming. Given how deeply Defence is entangled in the issues, an independent external review of the naval construction sector is essential if the taxpayer’s interests are to be protected.
  • The business case for further estate rationalisation should be examined, even though near-term costs will likely outweigh long-term savings in the current fiscal environment.
  • There can be no greater inefficiency in Defence than having the wrong force structure. The 2015 White Paper should ensure that plans for the ADF represent a coherent and effective strategy for protecting Australia’s interests in the 21st century.

There are of course many more things that could and perhaps should have been said. But the Commission’s scope embraces the full gamut of government expenditure—our goal was to alert them to the most important facts about defence spending and the best opportunities for further efficiency. Sometime in the next few weeks we’ll be able to see what the Commission thinks when they release their interim report in time to shape the forthcoming federal budget.

Mark Thomson is senior analyst for defence economics at ASPI.

Reader response to ‘DMO: industry’s view not accurate’

I know that my friend Mark Thomson was being somewhat tongue in cheek when sledging defence industry, but his put-downs (and defence of DMO) can’t go without a response. There’s a lot in his piece to demolish but let me start with this outrageous exaggeration:

I for one wouldn’t want to see a multi-billion dollar defence contract scribbled on the back of a restaurant napkin (or, perhaps more likely, a beer mat at a trade show).

Unfortunately, with this comment Mark seems to be channelling a view that’s gaining widespread currency within Defence: that industry is a bunch of liars, schemers and cheats always looking for ways to dud the Commonwealth. In my experience nothing could be further from the truth. During many years in industry, I’ve seen teams of highly motivated people working themselves to death—in two cases I know, literally—to deliver a product that’s often massively over-specified and required to be delivered in a ridiculous timeframe and with onerous commercial penalties for failure.

I’ve had quite senior people in Defence say ‘well, you shouldn’t have signed the contract in the first place’. This sort of out of touch arrogance typically comes from people who are salaried for life and have never experienced the real world, where staff lose their jobs if companies fail to win new work. Bureaucrats, people in uniform and—dare I say it—staff of think tanks, have rarely, if ever, faced the shock of being sacked. For those on the Government payroll, the sun rises and sets, the tides go in and out, the earth gently orbits the sun—and at the end of every fortnight there’s another taxpayer funded paycheck and another generous contribution to the guaranteed superannuation fund. Any ‘downsizing’ is done smoothly by natural attrition and most usually at the expense of contractors. Read more

On the other hand, the sheer commercial imperative of survival means that companies sometimes take on defence contracts the specifications of which they know from the outset will be tough to meet, but do so in the belief that if they work hard enough they’ll get there. And in some cases they fail and are then publicly whipped by Defence for their troubles. In many cases ‘failure’ turns out to be the inability to deliver the final 1% of what’s in any case a leading edge product. I leave out of this the problems of Government-owned entities such as ASC for reasons that by now should be self-evident.

In this article Mark concludes that industry has exaggerated the numbers in the growth of DMO. Be that as it may, what’s far more important is that DMO has become increasingly top heavy, increasingly bound by what seems from the outside to be completely meaningless process, slower than ever before in releasing tenders and slower than ever before in evaluating proposals and actually signing contracts. In the 1990s, the Department had an informal approach to tenders; they’d try to evaluate responses in about the same time that industry was given to write them in the first place. Now the length of time for evaluating RFT submissions has become so drawn out it’d be laughable if the consequences weren’t so serious.

Rather than just looking at ourselves without any external frame of reference, why not examine how countries such as Singapore and South Korea manage their procurement activities? They get far more bang for the buck than Australia does and have far better local defence industry capabilities into the bargain.

As a concluding point: all of these ASPI discussions are extremely useful, but why is there never a contribution from anyone inside Defence?

(Editor’s note: we’d be pleased to receive contributions from Defence on this topic.)

Kym Bergmann is the editor of Asia Pacific Defence Reporter and Defence Review Asia.